If Tony Blair were to heed the wishes of backbenchers and cool his ardour for George W Bush, he could add a PS: George, tell your people to buy smaller cars.

Crude prices that had hovered around $40 for close to a week - thanks to the 'war on terror' and a shortage of the right kind of petrol in the US - hit a 13-year high of $40.77 on Wednesday with news that US gasoline stocks had fallen by 1.5 million barrels.

British petrol prices are rising towards £4 a gallon, road lobbyists are grumbling and there is an election on the horizon, so this was not good news for Blair.

For the markets, which expected US stocks to rise, it was a shock. Christopher Bellew, an oil trader at Prudential Bache in London, said Wednesday's figures were merely the latest in a bewildering slew of news that has consistently surprised traders. 'A lot of people have been caught out of step with the market and been very surprised by its strength,' he says. Other traders are pointing north to $50.

The gloom has been unremitting. In March Opec, in a move orchestrated by Saudi Arabia, announced a 1 million barrel a day (b/d) output cut to stem stock building among consumers and prepare for seasonal decline in demand. Shortly afterwards data showing a 1 million b/d increase in already massive Chinese demand were pub lished by the International Energy Agency (IEA).

Then came terrorist attacks against Saudi Arabian oil installations and attempts to blow up an oil terminal in Basra. Last weekend, saboteurs cut a pipeline supplying the terminal.

On top of this, the US has been sucking in crude to fill its strategic petroleum reserve at 200,000 b/d, 25 per cent faster than over the previous year. By last week, Saudi was promoting an increase in production of 1.5 million barrels to ease the price. But Opec said it had not agreed to this.

Meanwhile, production estimates for non-Opec countries - which account for 66 per cent of crude output - have been revised down by the IEA. Confusion reigns, which is good for speculators. Hedge funds have been taking long futures positions, says Bellew, indicating they think the price is rising - a trend they are helping.

Airlines have jacked up their fares. British Airways followed Qantas and Air New Zealand by adding £5 on return trips. The Bank of England was aware of the oil problem when it took its decision to raise interest rates. And Labour MPs will have noticed price rises as they drove to their constituencies this weekend.

So how long will oil prices remain high, and what damage is being done? Deutsche Bank's Adam Sieminski says: 'High oil prices are likely to remain until you see a significant change - either a rise in interest rates and a slowdown in the US that makes its way into Asia, or a lot more oil production coming out of Iraq in particular.'

Sieminski dismisses the notion that oil supply is peaking and high prices are here to stay. But he concedes there could be serious economic effects. 'There is a risk that oil prices at these levels will slow down economic growth. The rough rule of thumb is that a $5 increase in oil shaves a quarter of a per cent off GDP.'

Warwick University's professor Andrew Oswald adds: '$40 is enough to be bad news for the major economies. There have been three oil shocks - in 1974, '79 and '91 - and recession has followed each. You saw a similar effect after the spike in 2000.'

Those looking for evidence of price strength found it in last week's oil market report from the IEA. It upgraded its forecast for global demand growth to 1.95 million b/d, or 2.5 per cent, a rate not seen since 1988. Antoine Halff, who studies demand factors for the IEA, says: 'There is big demand for three key things: transport fuel, gasoil (diesel) for electricity generation and petrochemicals. All are likely to stay with us even if governments succeed in containing economic growth.'

China is leading developing world demand because of its size and the growth in its industrial production. Other countries such as India are geared more towards services. But demand has also unexpectedly leapt in Europe and North America. And while the IEA believes it has underesti mated demand, supply is also a big problem. Sieminski points to slower-than-expected production increases in Iraq, currently producing some 2.4 million b/d. Optimists had hoped to have reached 3 million b/d by now, but that could be a year or more away.

David Fyfe of the IEA estimates that growth in supply this year is down from 1.3 mil lion b/d to 1.2 million. And questions about the true extent of oil stocks have also been raised by the reserve booking scandal at Shell.

As much as past oil shocks have caused recessions, though, there have been significant changes that will dampen the impact this time around. The first is that developed countries are less dependent on oil than they were in 1979. Second, today's $40 price may be close to the all-time peak of $41.15, but in real terms 1979 prices reached $80 in today's money.

Third, as Julien Seetharandoo of consultancy Capital Economics points out, Brent crude was $24 a year ago but the average 2003 price was $29, while the 2004 average is $33 so far, an increase that actually looks quite modest.

Concerns about inflation and growth, he says, may be overstated. 'If Opec increases its production and Chinese demand moderates - as we expect it will - we should see prices back within Opec's $22-28 range.' But, he adds, 'in the short term things will remain extremely volatile'. And for airlines, lorry drivers and prime ministers, it is the short term that counts.